A Fly in the Ointment: AT&T move nearly disrupts Tellabs/Ciena merger plans

Late-breaking developments last week indicate that an amended version of the proposed merger of Tellabs and Ciena will likely go through early next month, ending a saga sparked by an eleventh-hour equipment decision by AT&T that raised uncertainty about the vendors' future together.

The havoc began Aug. 14 when Ciena disclosed that AT&T had terminated trials of the vendor's 16-channel dense wavelength division multiplexing (DWDM) gear, citing its planned deployment of 40-channel systems instead. Tellabs' and Ciena's stock both tumbled, likely in response to that news plus Ciena's third-quarter revenues.

Then, on Aug. 21-minutes before the boards of both Tellabs and Ciena were to vote on the merger-Ciena informed Tellabs that AT&T would not consider Ciena's 40-channel system at all. Ciena's stock took a nosedive, and both companies postponed shareholder votes on the merger until Sept. 9.

Last Friday, however, the boards of Tellabs and Ciena announced that they had renegotiated the merger agreement and approved it at the ratio of 0.8 shares of Tellabs common stock for each share of Ciena common stock. The stockholders of both companies still have to approve the merger and will now likely vote after Sept. 9.

All along, Ciena recognized the implications of the AT&T decision and Tellabs' responsibility to its shareholders, but the vendor never considered it a deal-breaker.

"We feel the market overreacted," said Denny Bilter, director of marketing at Ciena. Tellabs was mum on the topic pending the shareholder meeting, and AT&T would not comment on reasons for its abrupt turnaround.

Meanwhile, Ciena was hit with another disturbing development last week when two law firms filed class action lawsuits against the company on behalf of Ciena shareholders, charging the company with issuing misleading statements that artificially inflated stock values. One suit alleges Ciena failed to disclose that its 16-channel DWDM system was "outdated" and did not meet AT&T's requirements. Ciena said the lawsuits lackmerit.

For both Tellabs and Ciena, the entire situation underscores the importance of having a broad customer base and a diversified product portfolio-the main reasons the companies pursued the relationship in the first place.

"Any time a contract doesn't come in, it can create havoc," Bilter said. The best remedy for that is the Tellabs merger, he said. "It will take away a lot of the volatility that's associated with our market."

Several technology and financial analysts said last week that they never expected the merger to be upended. But one said the developments are symptomatic of a weakness in the DWDM market.

"This is just too thin a market to justify the premium price for Ciena," said Tom Nolle, president of Cimi Corp.

Some observers have argued that bringing on Ciena will be valuable to Tellabs because of the local network potential of DWDM, but Nolle called that perspective "an asinine value proposition."

"The role of DWDM in the local space is utterly unproven," he said. "It's a more vacuous proposition than the ATM hype of the early '90s."

In the midst of the turmoil last week, Ciena announced that Sprint is boosting its Internet backbone to OC-48 (2.5 Gb/s) between Fort Worth, Texas, and Kansas City, Mo., using a combination of gear from Ciena and Cisco Systems. Sprint will tie Cisco's 12000 Series gigabit switch routers directly into Ciena's DWDM system to expand its optical layer and eliminate the need for Sonet multiplexers for data transport. Bilter said this is a more efficient method of data transport that promises to change the makeup of the traditional public network.

"You can eliminate a whole layer of equipment and go directly onto the fiber," he said. "This is going to be a standard network architecture."